Compilation | Wu Talks about Blockchain

This audio is from the Twitter space hosted by RootData in which Jason Kam, founder of Folius Ventures, participated. Wu Shuo is authorized to reprint it.

Jason said that he has hardly made any moves in recent months and is not so optimistic about the cycle. In the past, if you invested less than 50 million US dollars in a 10% share in the earliest stage, and then the project party took over the exchange, it could even have no products. As long as the popularity was built up and they figured out how to get listed on Binance, they could get excellent book returns. After everyone understands this routine, they will find that there are many standard game-building projects. The industry has an oversupply of projects that have no hematopoietic ability, and the lack of buying in the secondary market has led to the current situation. DISCORD, Telegram, and even games on Twitter have great opportunities. There is a high probability that a platform similar to 4399 mini-games will grow on TG.

About Jason and Folius Ventures

Ruby: Good evening, everyone. Welcome to the first event of the Crypto Financing First Lesson series space hosted by RootData. I am the host Ruby, and the theme of tonight is "Crossing the Bull and Bear: The Wisdom Behind Primary VC Investment".

We are honored to invite Jason Kam, founder of Folius Ventures. Jason graduated from Carnegie Mellon University and worked on Wall Street. He entered the Crypto field in 2018 and created the Twitter account @MapleLeafCap, which now has more than 45,000 followers. Jason will share with us his investment experience in market fluctuations and his insights into the future trends of the crypto market.

Could you please briefly introduce yourself and Folius Ventures?

Jason: Hi everyone, I’m Jason. Folius Ventures was founded in September 2021. It was interesting at the time. After DeFi Summer in 2020, my two friends Ben and Santiego suggested that I start a fund because the market really needed more attention to the Asia-Pacific region, especially entrepreneurs with unique backgrounds.

Since its establishment, in almost three years, the scale of funds we manage is about 220 to 230 million US dollars. The team has 5 people, mainly in Asia, including Shanghai, Shenzhen, Hong Kong and Tokyo. We are different from other institutions in three aspects. First, although we have made fewer moves in the primary market this year, we have invested more in the primary market in the past two years. We are a mixed primary and secondary investment fund. The single investment amount in the primary market is generally between 500,000 and 4 million US dollars. We can lead or follow the investment. We have a larger position in the secondary market. We can buy mainstream assets such as BTC and ETH, and we can also invest in small-cap projects like Pump.Fun. We have a very open investment strategy.

The second difference is that we have always preferred entrepreneurs in the Asia-Pacific region. 80% to 90% of our investments are concentrated in the Asia-Pacific region.

Third, our investment cases are mostly concentrated in the application layer, such as centralized exchanges, SaaS software, mobile application games and other consumer-oriented products. I am very honored to be invited to participate in this event.

Ruby: We noticed that Folius Ventures is still active in the current market environment, especially investing in some well-known projects in the seed round. Can you share the reasons why you continue to invest in such a market environment?

Jason: In fact, our investment pace has slowed down a lot this year. In addition to We.Rich, MegaETH, Catizen and WSPN are our recent cases, but in fact many projects have completed financing last year, but the news was only released recently. Since March of this year, we have made fewer and fewer investments, and there has been almost no investment in recent months. This is similar to the situation of other peers. The reason why we are cautious is mainly because we are not optimistic about the market cycle. In the past few years, the model of most VCs to make profits through rapid listing and exit is changing, and the strategy needs to be readjusted.

Secondly, we prefer to invest in the application layer, but good opportunities are hard to come by, and the emergence of entrepreneurs is also somewhat volatile. These three factors combined have slowed down our pace of investment this year. Of course, the timing of financing disclosure is not determined by us, so it may give people the illusion that we invest frequently, but in fact it is not the case.

How should the current VC investment model be restructured?

Ruby: You mentioned that currently, Tier 1 VCs generally adopt a wide-ranging approach, planning to list on CEX within 6 to 12 months. You think this investment exit method needs to be restructured. So, what should your ideal VC exit model be?

Jason: First of all, I want to take a step back and talk about this, because in the past this industry had a "relatively cool secret". In the early stages, if the project valuation is below 50 million US dollars, you invest in it and take a 10% share. As long as the project party can overcome the listing problem of the exchange, even without the actual product, as long as there is enough market heat and someone is willing to pay, the exit cycle can be calculated on a monthly basis. In other words, if you invest now, the project can be listed in three months. The liquidity brought by the exchange and the involvement of early traders will enable early investors to obtain extremely high book returns.

If these early private equity investors not only invest in the company, but also obtain shares through the project party in the form of advisory agreements, pledges or airdrops, and can even unlock them at TGE (token generation event), then the entire exit cycle will be very short. Even if there is a standard cliff period (usually 12 months), in many cases the project can make investors pay back in the first month, and the rest is all profit.

This strategy started to become popular around 2019 and 2020, and today everyone has seen through this model. Even many projects have to operate in this way even if they are not looking for a quick exit. We estimate that in the next 6 to 12 months, there may be 50 to 200 projects with a valuation of more than US$500 million, and they are all eyeing listing on exchanges.

However, the problem is that after these projects are listed, their circulating shares may only account for 2% to 10%. Without exception, these projects will face a large amount of circulating shares unlocking within 1 to 2 years after listing, increasing from 2% to 10% to 20% to 50%. In other words, the circulating shares may increase by 5 to 10 times.

If more projects are listed in the next six months, the supply of circulating stocks in the market will increase rapidly. But I don’t think the secondary market of Crypto has enough capacity to take over. We have observed that the amount of funds willing to bet on non-Bitcoin and non-Ethereum assets is far lower than the fundraising scale of the primary market. Therefore, I think the dilemma facing the entire industry is: there is not enough blood-making ability, there is an oversupply of projects, and there is insufficient buying in the secondary market. This is also one of the main reasons why we slow down our investment.

Views on the recent tensions between retail investors and VCs

Ruby: Recently, there has been more and more discussion about the tension between retail investors and VCs, especially the rise of FUD sentiment. Retail investors seem to be becoming less and less friendly to institutional investors/VCs. How do you see this relationship developing in the future? What role will VCs play in it?

Jason: Actually, you invited me here today because you hope that I can talk about my views on this issue more "truly", right? I try to share my views sincerely. Regarding the relationship between VC and retail investors, I think the first thing to say is that this binary opposition does not completely exist in the traditional financial market, but it is relatively "soft". In the traditional market, as an early angel investor, VC provides funds to help companies grow, and companies continue to raise funds until they exit in the secondary market. The difference here is that traditional markets such as A shares, H shares or US stocks have a relatively mature secondary market, and the companies themselves have a clear profit logic, which can be reflected in the value of equity.

Therefore, when a company goes public, retail investors do not feel that they are "taking over" for VCs, because the listed companies themselves are valuable and have clear profitability. This makes the relationship between retail investors and VCs less tense in the traditional market, and everyone's interests are more aligned. In the Crypto field, this relationship is different.

Why does "bad money drives out good money" occur?

Jason: In the Crypto industry, there is a problem of "bad money driving out good money". I think there are several main reasons. First, as we discussed before, the liquidity of the market is easily manipulated and the exit mechanism is relatively simple. This environment allows many scam projects to easily enter the market, which is a common problem.

But there are two more core reasons:

First, after adding Web3 elements, it is actually very difficult to create a business model that can be sustained in the long term and is not affected by market cycles. If you believe that tokens can capture value, this value capture is cyclical and highly volatile. The revenue of a project may decrease by 80% when the market falls, which has a great impact on valuation. Therefore, even if you buy a recognized value project in the industry, such as BNB or the tokens of large public chains, these assets will be hit hard when switching between bull and bear markets. This also leads many people to believe that the quality of tokens invested by VCs is not high.

Second, although some project owners have excellent business capabilities, they may not be willing to reflect this value in their tokens. The industry does not require project owners to do so, and even if they are willing, they will face the supervision of the US SEC. If the project performs very well and even touches the jurisdiction of the SEC, it may cause bigger problems. This leads to companies that are truly valuable often being unwilling to issue tokens, while companies that do not have a business model are willing to issue tokens, forming a situation where bad money drives out good money.

In addition, the common token design model in the industry is also a problem. Usually, the token design allocates more than 50% of the shares to the community, 20% to 25% to the team, and the remaining 20% ​​to 25% to investors. This is an industry practice. If it is not followed, both the exchange and the investors may be dissatisfied. However, the purpose behind this design is to avoid touching the SEC's definition of securities, because the SEC is more inclined to identify centralized tokens as securities.

However, the problem with this design is that many project owners will issue tokens with low circulation and high valuations in order to meet the high valuation requirements of VCs. This design makes it difficult for the business growth rate to exceed the inflation rate of tokens in the early stages of the project, resulting in a sell-off of token prices.

Nonetheless, I think if a project has a sufficient unlocking mechanism and its core business growth and value capture can exceed the inflation rate, then these tokens are still worth investing in. Sorry, the answer is a bit long.

Using Pump.Fun and Banana Gun as examples to analyze different project operation models

Ruby: The projects you mentioned that are unwilling to issue tokens may indeed have stronger business capabilities. For example, Pump.Fun has strong revenue and does not need to exit through issuing tokens. And projects like Banana Gun, although they also have their own revenue logic, still choose to issue tokens. What do you think of these two types of projects?

Jason: My view is that capitalization is indeed one of the best ways for a team to realize its efforts for many years to come. In the field of Crypto, if a company is a leader in the industry, has high attention, and can convince the community that its business model is sustainable, it can obtain a high valuation by issuing tokens.

However, what the project side needs to consider is whether capitalization will affect the advancement of the business. For example, if Pump.Fun issues tokens and the valuation reaches $500 million or $1 billion, but then competition emerges, such as someone launches Sunpump, which causes Pump.Fun's revenue to decline, the valuation may fall by 40% in a few days. In addition, the SEC may consider this behavior to involve unlicensed securities issuance, which will cause trouble for the project.

In contrast, smaller projects such as Banana Gun, although they have also issued tokens, are smaller in size and may not attract regulatory attention. If it does not target US users, there will be relatively few problems. Therefore, whether to issue tokens depends on the project's business model, market size, and degree of dependence on the US market.

There are so many projects on the market that retail investors don’t know what to buy

Ruby: Many projects on the market now seem to be very "copycat". As a retail investor, I really don't know what to buy.

Jason: This is indeed a difficult question. I have done some statistics before, although I haven't updated it for a few years, but according to my observation, there may be 20,000 to 30,000 tokens on the market now, of which there are probably only 2,000 to 3,000 projects that are really substantial. Among these projects, there are less than 50 projects that may really have long-term value capture potential. These projects not only have actual business models, but also perform well in terms of user volume and cash flow capture.

Many large Layer 2 projects are good examples, and their cash flows are often distributed to equity rather than token holders. As a VC, in the early investment of these projects, you can usually make a profit through advisory agreements or airdrops, while retail investors can only bear the pressure of the decline after the tokens are sold. Therefore, shorting these projects by defunding may be a good choice.

Folius Evaluation Project Criteria

Ruby: In the current market environment, project valuation has become increasingly complex. So, what changes have you made in evaluating projects compared to before? Do you have any new criteria or methodology?

Jason: I think we can look at the project from two perspectives. First, we need to look at the project's ability to do two things:

The first is their ability to do things, that is, whether they can execute, whether they can implement business logic, whether they can attract users to use their products, and whether they have cash flow thinking. This is about the ability to get things done, which determines whether the project can survive.

The second is their ability to “set up the game” and tell stories, which determines how well the project can survive and whether it can get a high valuation in the industry. Simply put, the former determines whether it can survive, and the latter determines how well it can survive.

If a project does well in both aspects and has a leading position or is the only player in its niche, then I think it is a project worth getting involved in early. Such a project has a greater chance of crossing the bull-bear cycle, and even if it is stuck at a certain node in the current market cycle, we are willing to invest.

To put it another way, if the project is strong in execution but not so good at storytelling and planning, then they must hit a very strong rigid demand market, or be in a track where the value has not been fully explored. Even if the project's official website, resources, and founders are not so outstanding, as long as the business itself can make money, especially if it can capture the mass users of Web3 and generate cash flow, we will still consider investing, but there may be some uncertainty about the exit of such projects.

As for those companies that specialize in setting up schemes and telling stories, such companies are very common in the industry. Often, they cannot clearly state what their actual business is, but they focus every day on how to push projects onto major exchanges such as Binance, provide an exit channel for all participants, and increase valuations. Such projects are too risky and have too many uncontrollable factors, so we usually do not participate. After all, it is difficult for us to get in touch with the core level of setting up schemes.

Therefore, if a project has neither strong execution nor storytelling ability, it will be difficult for us to take action.

Ruby: You mentioned earlier that you prefer to invest in long-term projects. When choosing an investment, do you pay more attention to the team or the project itself?

Jason: This is a good question. Simply put, adults don't make choices. It's best to have both a team and a project. You need both an excellent team and an outstanding project. It's ideal to have both.

Continue to be optimistic about the application side, especially small games

Ruby: I find Folius Ventures' investment direction very unique. I am tempted to follow your portfolio and buy it.

Jason: Actually, this is a common idea, but I would like to remind you that even for the companies we invest in, the risk of loss when they first issue tokens is still very high. When many companies issue tokens, the circulating market value is very high, but the tokens are unlocked too quickly, and the inflationary pressure is also very high. Therefore, although we try to choose teams with a long-term spirit and can survive bull and bear markets, we cannot guarantee that every project can avoid inflation problems in the market when issuing tokens.

Ruby: Got it. Which tracks do you think will have innovations in the future? Which directions will Folius Ventures focus on?

Jason: Our investment style is a bit unique, even a bit "weird". An LP once told me that the projects you invested in have not been invested in by other GPs. It may be because we often like some projects that seem "weird" (laughs).

I think the industry infrastructure is mature enough, but there is still a lot of room for optimization in user experience (UI/UX). If there is a company that can really do this, we will be very interested. Many of the investments and evaluations we are doing now are to lay out the next market cycle and drive more people to use Web3+ products. I have always believed that the reason why the application side did not come out in the past was because the industry infrastructure was not supported enough, not because there was a problem with the ideas themselves.

On the ToC side (the consumer-oriented area), we are now focusing on several points:

1. The project must be able to touch upon the weaknesses of human nature, such as greed, addiction, and even vanity like the desire to look better than others in games. These human weaknesses are often the driving force for consumption, and consumption behavior can keep the value transfer of the project away from pure speculation.

2. In terms of platforms, I think there are great opportunities for small games on platforms like Discord, Telegram, and even Twitter.

3. In the past, we have invested in many projects that rely on economic models to attract users. Some Ponzi-like projects are prone to collapse at a certain point. In the future, we hope to find projects that have entertainment attributes and can create consumer behavior, even if they rely on some kind of economic reward mechanism.

In addition, we hope that the project will precipitate network effects and user groups during its development, which is the key to long-term value. We are particularly optimistic about ToC products that combine human weaknesses, traffic, and Web3 elements.

For example, we like the Catizen team very much. They have been working in the ecosystem for a year and a half. We think that in the future, there will be a product like 4399 Mini Games Platform on Telegram, and Catizen has the potential to occupy this position. If they can maintain long-termism and keep improving, the market will recognize them.

In addition, projects like WSPN are also promising. Considering that the market capitalizations of Tether and Circle have reached 100 billion and 30-40 billion US dollars respectively, I think there will be opportunities to pass on the equity of stablecoins to users in the form of tokens in the future. This field requires a team that has both industry appeal and implementation capabilities. Perhaps Richard from Binance is the right person, after all, BUSD has previously achieved a scale of 20 billion US dollars.

There is also a project like Puffpaw on Berachain, which is an e-cigarette project supported by Web3, involving product design, aesthetics, D2C consumption (direct-to-consumer sales), and how to integrate with Web3. There are challenges in every link, but the tobacco market is a rigid demand, especially for smokers, consumption is continuous. Therefore, although this type of project is very challenging, it is also worth trying.

The Solana ecosystem has great potential

Ruby: Yes, projects like Catizen and Puffpaw on Berachain are very interesting. Recently, Solana ecosystem is also a hot topic. Some people think it is like the previous BSC chain, which will not be mentioned again after the meme carnival. Jason, what do you think about the future of Solana ecosystem?

Jason: First, we can take a step back and see what kind of public chain is attractive. A successful public chain or Layer 2 needs to have very strong investment attraction and service capabilities. It should not only attract developers, but also think about how to make companies in the ecosystem profitable. This may involve fiat currency exchange, optimization of user experience, and especially reducing the threshold and friction for users to enter the ecosystem.

On the technical level, I think that in addition to independent innovation, public chains also need to have a certain degree of "take-it-as-it-is". There is no need to stick to the sectarian view. Whatever technology can promote the prosperity of ecological business should be adopted. Ultimately, the standard for evaluating a public chain should be the degree of friction for users to enter the ecosystem, the amount of funds, the real interaction of users, and the application experience on the chain.

From this perspective, Solana is undoubtedly one of the ecosystems that is performing very well at the moment. I think it has a place in the top five public chains. The Solana team, especially Lily (Chairman of the Solana Foundation) and her team, have done a very solid job in promoting the implementation of applications. They are always thinking about how to better serve applications and users.

In addition, Solana's ecosystem also includes Telegram and Coinbase. For example, Telegram's Wallet Stars, the full-chain application on Coinbase, and the fiat currency deposit solution. Although some projects such as Blinks performed mediocrely, gadgets like Tiplink still demonstrate Solana's potential in supporting on-chain business systems. If Ethereum does not make further efforts in this regard, it may lose its competitiveness in the next cycle and even be forgotten by the historical stage.

So, overall, the Solana ecosystem has great potential in terms of commercial implementation and user experience, and if other public chains do not keep up with this pace, they may gradually fall behind.

It is recommended that entrepreneurs make use of resources from multiple ecosystems as much as possible.

Jason: Regarding the founders of the project, although the current "chain abstraction" technology is not yet fully mature, the founders still need to choose which chain to stand on in the early stage. For example, the development difficulty of the TON chain is very high, and even developing small games on Solana is easier than on TON. Although Solana has high requirements for programmers, developers of the EVM ecosystem are relatively easy to find. However, developers of the Base ecosystem may sometimes be "aloof" and ignore entrepreneurs. Every chain has its own problems.

My suggestion is that before the business logic closed loop is run through, try to avoid binding yourself completely to a certain chain. The ultimate direction should be application agnostic. But this does not mean that entrepreneurs cannot use the resources of Layer 1 or Layer 2 ecosystems. On the contrary, you should seize the opportunity to use as many resources of these ecosystems as possible, whether it is financial support or technical support. Even if you want to stand on the side, you can first gather resources and wait until the project scales up before considering other directions.

The market will continue to reshuffle in the next 18 months

Ruby: The last question is, I would like to ask you to "recharge" some confidence for everyone. As a primary investor, how do you think the next bull market will be different from the past? What do you think about the future market trend?

Jason: If you remember 2019 or earlier, it was relatively easy to invest in primary projects. There were not as many Crypto VCs as there are now, and there were limited projects on the market, such as The Graph, Circle, FTX, etc. The entire market was small at that time, and even an intern could study all the projects in two weeks. Most investors were still focused on the secondary market.

However, from 2019 to 2023, you will see a large number of entrepreneurs pouring into the Crypto industry. Many people come to start businesses partly because they really believe in this industry, but it is undeniable that many people come with a speculative mentality. Behind the scenes, including us investors, we have also entered this market in large numbers.

As a result, the number of projects that can truly capture long-term value has not increased significantly, but the number of projects that want to be listed on exchanges, issue coins, and cash out has surged by 10 times, 100 times, or even 1,000 times. Under such circumstances, if the market is not as liquid as it was in 2021, the result will be increased pressure on the entire industry.

Currently, if you remove BTC, ETH, and StableCoin from the $1.1 trillion Crypto market, and remove some old projects that survived the previous cycle, such as Dogecoin and ADA, the remaining Altcoin market may only be $150 billion to $200 billion. The market value of this part of the market has fallen below the level at the beginning of the year. If another 20% of new projects enter the market and the circulation of each project increases by 50% to 100%, the result will be an average decline of 15% to 80% in the Altcoin market, which is what we have seen so far this year.

Jason: I think the market will continue to reshuffle in the next 18 months. Many VCs need DPI (dividend multiples), so they will sell the tokens when they get them, and the project parties are also in urgent need of cash. Although I have expectations for the projects we invest in, hoping that they can establish a business model and cross the market cycle, I think the market may get worse before it gets better.

However, the outlook is not all doom and gloom. I think if we look forward 12 to 14 months, especially after the US election next year, if Trump is elected and appoints a new SEC chairman, we may usher in clearer token policies and regulatory sandboxes around June 2025. If there is a clear policy framework, smart lawyers and project owners can design legal and compliant value capture methods. If all goes well, in the next 24 months, Web3's user acquisition model, monetization model, and last-mile conversion will be improved. I believe that by that time, a group of very good secondary projects will emerge in the market.

Once the secondary market becomes active, the investment environment in the primary market will be healthier, similar to the current entrepreneurial ecosystem in Silicon Valley. Therefore, although the market will experience a reshuffle in the next year, I believe that if the above expectations come true, the future will be better.

Ruby: I understand. Although we may experience a downturn in the short term, our industry still has great prospects in the long run. This requires us builders to continue to work hard.

Jason: You're welcome, but I want to add one more thing. To start a business in this industry, you don't necessarily have to take the common route we all take, such as building a complex financial model, creating a product that fits the market, and then listing on Binance to cash out. This is certainly one way, but it's not the only way.

There are a lot of companies with very strong cash flow, and although you may not have heard of them, their business models are very robust. For example, exchanges and stablecoins are very "cash flow positive" businesses, and as long as they deal with regulation, they can make huge profits. In addition, there are other less well-known but very profitable companies, such as DEX Screener, which is a tool for monitoring Dogecoin and has a daily income of tens of thousands of dollars. There are also some well-known SaaS companies, such as Elliptic, which provides KYC services, Certik, which does audits, and Chaos Labs, which simulates protocols, all have robust income.

Therefore, entrepreneurs do not necessarily have to take the route of issuing tokens and cashing out. It is also a good choice to dig deeper into some clearer business logic and choose entrepreneurial directions that have stability and cash flow.